Highlights from the EO print edition, issue no. 427, July 13, 2009

Dangers of a Bubble Economy
Cover, lead story
~ An inflated stock market, a real estate bubble and rocketing raw material prices - it all reminds us of the situation in 2007 when one word could be used to described China's economy: bubble.
~ However, at that time, GDP was growing at 13 percent. Things are fundamentally different now with growth of less than 7% expected for this year. Given that themacro-economy is still weak, it's difficult for analysts to understand what's driving this capital bubble.
~ Although excess liquidity is the prime suspect, the general rule that investing in industry is risky during a downturn, has meant that stock and property markets have been attracting investors. Speculators may be enjoying the boom, but experts warn of the effects of the bursting bubble on the real economy.
Original article: [Chinese]

No Shift in Macro Policy in Second Half
News, page 2
~ There is no need to change China's macroeconomic policy settings, argues Zhu Baoliang, an analyst from the state information center.
~ The economy is already showing signs of a recovery with fixed asset investment up, a booming auto market, a rising housing market and stock-piled inventory being reduced at a faster-than-expected rate.
~ However, investment in manufacturing and investment from the private sectors is still weak and the decline in exports looks set to continue. The risk of inflation is also up.
~ He suggested the government stick to an expansionary fiscal policy and loose monetary policy, stabilize the auto market, increase export credits in RMB, accelerate reform of the industrial structure, adjust the distribution of national income and continue to advocate for the reform of the system by which resource prices are determined.
Original Article: [Chinese]

2010 Budget to Freeze Central Government Spending
News, page 3
~ The growing fiscal deficit has prompted the Ministry of Finance to release the 2010 budget earlier than usual.
~ The Ministry of Finance has called for a freeze on expenditure in every ministry and a 15 percent decrease in public spending.
~ It's predicted that China will continue to reduce government expenditure over the next few years.
Original Article: [Chinese]

The Company Formerly Known as "CIC No. 2"
News, page 5
~ China will set up a third state-owned assets management company under the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) this month. The company will be called Guoxin Asset Management Co.
~  The two existing  state-owned assets management company are the State Development and Investment Corporation (SDIC) and China Chengtong Group. SDIC is charged with taking over state-owned enterprises that are complementary to its own business, while Chengtong is responsible for turning smaller unprofitable enterprises around.
~ In earlier media reports, the as-yet-to-be-named new asset management company was often referred to as "CIC No. 2", in reference to to the China Investment Corporation, but in fact in would have made more sense to refer to the company as "Chengtong No. 2", as it has now been revealed that the new company will complete tasks similar to that handled by Chengtong, namely, turning small-scale, unprofitable assets of central enterprises supervised by SASAC into profitable companies.
~ Though each company has a different focus, the three share the task of reducing the number of state-run central enterprises to between 80 and 100 by the end of 2010.
Original Article: [Chinese]

Internal Stats Reveal Nature of Housing Growth
News, page 6
~ China's property market has started to pick up over the first half of this year, with both rising prices and an increasing number of deals taking place. However, a classified report from National Bureau of Statistics reveals that this growth is limited to certain areas and particular kinds of property.
~ A spike in housing prise in June saw the average price jump to 15,051 yuan/square meter, though this was still below the 2008 peak of 17,353 yuan/sqm.
~ According to the NBS report, small and large properties sold well, as did those located in downtown areas. However, medium-sized housing and houses located in suburbs actually went backward.
~ The second-hand housing market, which is dominated by medium-sized properties, was also sluggish.
~ According to private analyst Zhang Yan, it's possible that the prices of smaller properties will continue to rise but that large properties will reduce in value next year. Zhang puts this down to the failure of the government to control the investment in larger, higher end apartments at the expense of smaller, cheaper properties
Original Article: [Chinese]

First Profits from Agricultural Land Transfer Pilot in Shandong Shared
Nation, page 14
~ Members of China's first land transfer cooperative in Xuzhuang Town of Zaozhuang City, Shandong Province received revenue and dividends this month, a year after the cooperative was established.
~ This land transfer cooperative allowed the farmers to lease the right to use of their land. Aside from collecting rent, the members of the coop also receive dividends at the end of each year.
~ This kind of production is being trialed as a way of meeting the needs of modernized and large-scale agricultural production, effectively boosting productivity and raising the rural residents' income.
~ The cooperative might evolve into an agricultural conglomeration.
Original Article: [Chinese]
 
Dramatic Expansion of Bond Market
Market, page 19
~  Though the benchmark interest rate has been lowered by 10%, companies are turning to bond issues, instead of bank loans, to raise funds.
~ "For most banks, there is no room to further lower their interest rate," a supervisor from China Construction Bank's client services department said.
~ However, many state-enterprises still think the official interest rate is still too high and are choosing instead to raise money by issuing bonds.
~ Up until July 8, 118 company bonds and 25 medium-term notes have been issued nationally this year, amounting to  200 billion yuan and 1.5 trillion yuan respectively, while last year, there were only 14 company bonds issued raising 49 billion yuan.  
Original Article: [Chinese]

Small and Medium-sized Enterprises Miss Out on Loans
Market, page 20
~ In June alone, more than 81.1 billion yuan in loans are said to have been extended to SMEs.
~ However, according to a report from the Academy of Social Science, 40 percent of small and-medium sized enterprises (SMEs) lack money to such an extent that they are on the verge of bankruptcy.
~ As of March this year, unused credit quotas at state-owned banks exceeded 6 trillion yuan.
~ Why aren't SMEs able to secure funds? It seems that the reluctance about extending loans is down to the high level of risk involved. At ICBC, the rate of bad loans for SME is 2.91 percent, while the overall average non-performing loan rate is 1.97 percent.
Original Article: [Chinese]

Delay of New Rules Governing Private Equity Investment
Market, page 23
~ Regulations governing China’s private equity firms, that were originally expected to be introduced in the middle of this year, have again been postponed. Insiders said authorities now hoped to unveiled the new regulations in October.
~ The difficulty in reaching a consensus on the new regulations were put down to the respective authorities attempting to defend their own interests.
~ Local private equity firms have operated in a legal grey area in China, with the NDRC having officially approved only a handful of local funds and no regulations currently govern the industry as a whole.
~ By passing the new regulations, the government hopes to free up capital in Chinese financial institutions that had until recently laid idle, and direct such funds into the real economy.
~ Currently foreign PE funds dominate China’s market, accounting for 95% of the total amount raised.
Original Article: [Chinese]

Shanghai GM Downplays Beijing Auto's Move on Opel
Industry, page 35
~ Shanghai General Motors said they are not worried about stated-owned Beijing Automobile' bid for Opel.
~ In June, China's Beijing Automotive Industry Holding Co. (BAIC) submitted a detailed bid for General Motors Corp's European unit Opel. Even if the deal goes through, industry insiders doubt if it will affect Shanghai General Motors, which shares the same platform with Opel.
~ "The technologies which have been licensed to Shanghai GM will not be affected by the selling of Opel," said Ding Lei, the general manager of Shanghai GM, he said although Shanghai GM may share a production platform with Opel, all the technology is directly acquired at the center, which will be absorbed by the new GM according to the regrouping plan.
~ However, if the bid is successful, Opel branded cars will be produced in China with low patent fees, and compete directly with Shanghai GM. Moreover, Shanghai GM will not benefit from any new technological advances made to Opel's production platform after the sale of the company.
~ Shanghai GM sold 288,800 cars in the first half of 2009 in China, an increase of 16.1 percent year on last year, many of the sales were of new models produced on the Opel production platform.
Original Article: [Chinese]